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There’s a softer tone across risk assets this morning. European equities and US stock index futures are all lower as investors kick off the week with some mild profit-taking. Bond yields have slipped and this has seen the dollar pull back in early trade. That has helped to lift precious metals which have had a torrid time since Donald Trump’s election victory. Investors dumped gold and silver as the dollar rallied. This was on expectations of a pick-up in growth and inflation thanks to Trump’s campaign promises of tax cuts and infrastructure spending. But last week’s Thanksgiving holiday appears to have broken the risk-on momentum. On top of that, this week sees the key OPEC meeting in Vienna where questions remain over the likelihood of agreement being reached over output cuts. Then on Sunday Italy holds a referendum on constitutional reform which could lead to political upset and repercussions for the country’s troubled banking sector. But before then we have the last US Non-Farm Payroll report ahead of the Fed’s rate decision in a fortnight’s time.

Stock Index Update

- Trump rally continues

- Italian investors wary ahead of referendum

It was a relatively quiet end to the week as far as global equity markets were concerned. Thursday’s Thanksgiving holiday took some of the upside momentum out of the major indices as trading volumes fell. But despite this, all the major US indices posted gains for the week as a whole. Meanwhile, the situation across Europe was mixed. The FTSE100 and French CAC and followed along in the wake of the US markets and both ended in positive territory. But the German Dax spent a second consecutive week effectively unchanged. Italy’s FTSE/MIB ended the week higher, but is still stuck in a relatively tight range ahead of this Sunday’s key referendum on constitutional reform. Italian Prime Minister Matteo Renzi has said he will resign if the vote goes against him. This could upset markets just as a number of Italy’s banks look to tap investors for more capital.

Commodities Update

- Wednesday’s OPEC meeting in focus

- Gold and silver attempt an end-of-week bounce-back

At the end of last week crude prices pulled back from their best levels. Earlier on both WTI and Brent had closed in on $50 per barrel. The two contracts got a boost on hopes that this week’s OPEC meeting will conclude with an agreement by all members to cut output. It was also expected that non-OPEC producer Russia would also agree to a production cut. But on Friday there were reports that Saudi Arabia was refusing to attend a meeting of non-OPEC producers today. Saudi representatives wanted a deal agreed ahead of the non-OPEC meeting. This is a concern as it previously looked as if most of OPEC’s 14 members are falling in with plans for a cut. But there is still a big question mark over Iran’s involvement. The country wants an exemption from any production cut as it wants to reinvigorate its run-down industry following years of sanctions which only ended at the beginning of this year.

Gold and silver managed a half-hearted rally on Friday thanks in the main to a modest pull-back in the US dollar. The rally has continued this morning thanks to a pull-back in the US dollar. Yet it continues to be a grim time for precious metals investors who have taken a battering following Donald Trump’s election victory. The main problem has been the dollar’s rally. Investors are convinced that Trump’s promised tax cuts and infrastructure spending plans will result in a pick-up in inflation. This in turn should mean that the US Federal Reserve will raise interest rates more quickly than previously anticipated to counter inflation. Precious metals struggle when rates begin to rise as rising rates make non-yielding assets look like a worse investment relative to bond. In addition, higher rates tend to make the dollar more valuable, meaning that it should take few dollars to buy the same amount of gold. The better-than-expected data is just one more aspect to add in to rising inflation expectations. As a result FX traders are buying dollars as they price in the prospect of further monetary tightening from the Fed. This is weighing on dollar-offset trades like precious metals.

Forex Update

- Dollar slips on profit-taking

- EURUSD dangerously close to March 2015 low

There was evidence of some profit-taking on Friday as the dollar slipped back in thin holiday trade. But for most of last week the dollar surged higher against all the majors. On Thursday, during thin holiday trading, the Dollar Index hit its highest level since the first quarter of 2003. The EURUSD traded at its lowest level since March 2015 when it briefly broke below 1.0500 and the Chinese yuan hit an 8-year low.

Investors continued to pile into the greenback as they anticipate a pick-up in US economic growth and inflation. This fresh positivity follows Donald Trump’s victory in the presidential election earlier this month. This was an unexpected result which initially saw a sharp sell-off in the greenback and risk assets in general. However, investors are now positioning themselves to take advantage of the tax cuts, infrastructure spending and regulatory overhaul which many believe will come as a result of Trump’s win.

The Dollar Index is up around 6% since the Trump clinched victory on 9th November. The EURUSD is down close to 7% over the same period. While the euro managed to recover a touch at the end of last week, it is dangerously close to its March 2015 low of 1.0460. If it were to break below here, then a move to parity couldn’t be ruled out.

Upcoming events

Today’s key economic data releases include Euro zone M3 Money Supply and Private Loans. European Central Bank (ECB) President Mario Draghi is due to testify about the ECB's perspective on economic and monetary developments and the consequences of Brexit before the European Parliament's Economic Committee.

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